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The Cash Budget

in this video we're going to walk

through an example of how to put

together a cash budget for a firm so

first it's important to understand that

before you put together the cash budget

you need to have all the other budgets

they have to be prepared for us so when

we think about like the sales budget the

production budget all these other

budgets have to be put together in order

to be able to even make the cash budget

right so we need to know about our

direct material expenditures that we're

planning before we would be able to put

together the cash budget so then in

addition to that it's just really

important to know how important it is to

have a cash budget for a firm because

you might have the best idea in the

world but if you run out of cash you are

not going to have a business so you

might say well hey if you have a great

business why would you ever run out of

cash well there might be something like

for example things like seasonality of

your business right you might run a ski

resort and it might be an incredible ski

resort but you don't plan on the fact

that oh wait in the summer months we're

just not going to have any cash coming

in you have to go on plan you have to

budget for that so that you have the

cash when you need it so let's walk

through an example and actually I've

chosen an example that would have to do

with seasonality and we'll think about

our example we've used in the previous

budget videos we'll talk about a firm

that makes bicycles right now you might

imagine that a firm the Mike's makes

bicycles might sell more bicycles in the

summer months than it would in the

wintertime when there's snow on the

ground so we've got this this kind of

seasonality issue and we can look at

that when we think about how our cash is

going to flow throughout the firm do it

during the year so now when we start out

with when we do our cash budget the

first thing is we start with what is our

beginning balance and and for the moment

let's just focus on quarter one I've

written out all the quarters and then

for the year because we're going to do

it on a quarterly basis and I've written

it out so that you didn't with this

video wasn't an hour along with me

writing all these things out but if you

just focus on this column right here and

then and then we'll get to the other

columns later so the first quarter we're

starting out with with our cash balance

of twenty-five hundred

right so at the beginning of this year

we look at the bank account and we say

we've got 2500 2500 bucks but then we

need to add in our cash receipts when

we're talking about cash receipts we're

talking about cash we collect from

customers right so for the most part

when we think about cash for receiving

it's just money from customers we could

make this maybe more complicated and

start thinking we have income from other

sources maybe we own a little bit of

real estate and we get some rental

revenue but we're not thinking about

that this is just a really simple

example when people buy bicycles or come

other businesses buy bicycles from us

those are our customers and then we're

going to receive cash from them now this

is where it comes into play that we

already need to know have done our other

budgets for example our sales budget

right because our sales budget we're

going to know the number of bicycles we

plan to sell and the price we plan to

selamat and that's where we're going to

get this 15 grand from right in quarter

one we went to our sales budget and said

okay how much are we going to receive

from our customers how many bicycles

that we're going to sell it what price

and so forth so we use that information

from that budget to input this $15,000

so that doesn't just come out of thin

air it comes from another budget now

once we know that we can actually put

together the cash available right and

cash available this is really simple if

you think about it this isn't really

that complex we're just saying we

started with 2,500 bucks in the bank and

we're planning on generating 15,000 in

cash from the bicycles that we're going

to sell in quarter 1 so cash on hand

cash available however you want to think

about it we're going to have seventeen

thousand five hundred dollars cash in

quarter one now you might be saying well

hey we're going to spend money to get

direct materials to make those bicycles

and so well that's what's coming next

now we think about our dispersed out

disbursements now will their

disbursements again we've got this issue

and here's our disbursements I've kind

of got a little while heading there and

all these here are our disbursements so

when we think about this all these are

going to come from those other budgets

that's what we talked about that you

make the cash budget last because we got

to look at the direct material budget

and say hey we've budgeted $3,000 in

expenditures for quarter 1 on direct

materials we've budgeted $4,000 in

expenditures from the direct labor

budget the overhead budget says 2004

quarter 1 and then the sgna budget says

10,000 so we pull all these numbers from

other budgets and so when we think about

all those disbursements we can just lump

them together and say we've got 19,000

and disbursements and so we can compare

that now compare our disbursements this

19,000 right which is the sum of all

these right here and then compare that

against the cash we had available all

right so we say we have 17,500 and cash

available but we're spending 19,000 hey

the disbursements are more than the cash

available well what does that mean that

means that we're going to have a

shortage of cash or a deficiency of cash

right now I've got this here we've got

this line item access or shortage and

I've got shortage in parentheses and the

reason for that is that that means that

if this number here is in parentheses

it's negative right instead of putting a

negative sign we just put it in

parentheses that's the custom so we just

said cash available minus disbursements

is going to be negative 1500 or 1500 in

parentheses that means that we are going

to be 1,500 short this quarter well does

that mean that we go out of business and

we go bankrupt in Quarter 1 well not

necessarily because we can go and we can

borrow money to what we would love we

hope we can borrow money in order to

keep the business going so that's going

to lead to our next section which is

actually called the financing section

and I and I left out the the financing

title and here because I want to be able

to fit all of this onto one screen here

so that you can read it I know there's a

lot going on just bear with me

so the borrowing section is going to be

maybe we have a line of credit with the

bank right some firms have a thing where

they say ok if we ever fall where we

have a shortage of cash in this corridor

we just generate automatically the bank

generates a hundred thousand dollar line

of credit at X percent interest rate but

we're going to say we're going to make

this really simple

we don't even have to think about

interest in our problem we're going to

say that you borrow the money from a

family member so you go to one of your

parents and you say hey I got this great

business but in the first quarter we've

got a shortage of cash and and then the

the summer months when we sell more

bicycles everything's going to be

alright but just right now I need a

little money and they say how much do

you need and you say you could say well

I just need 1500 to cover the shortage

but then you'd have zero so you're kind

of playing fast and loose with how much

cash you have but you might say you know

as a general rule I like to have at

least $2,000 in the bank at any given

time just in case there's an emergency

or something I didn't plan for so you

say I want an ending balance of 2,000 to

get that ending balance given you have a

shortage of 1500 what do you need in

terms of borrowings to cover the 1500

and to cover this 2,000 you want to end

with well that's going to be 3,500 right

because if you took 3,500 and you

subtracted out this shortage of 1500

then that's going to give you 2 grand

right so then you're left with $2,000

and repayments if you see these two ray

or we're talking about repayments we're

not going to we're not repaying this in

this quarter will repay it on some point

in the future when we generate some more

money and again we don't have to worry

about interest at all because it comes

from a family member who is so generous

they're not going to charge us interest

on the loan and so our final and again I

hope you can see all this in the screen

and that some of its not being cut out

but we started with fifteen or twenty

five hundred dollars in cash at the

beginning of this quarter and now we're

ending the quarter with two thousand

thanks to this this loan is borrowing

from one of our family members that

helped us deal with this shortage of

cash now now we can start thinking about

I'll just grow up so you can see the

quarters in that was all four quarter

one and then quarter two I'm going to

walk through a little more quickly

because we just went through it we

scroll down so now we're going to start

with two thousand dollars and you might

say where'd you get that two thousand

dollars from well we got it because the

beginning balance of quarter two is the

ending balance of quarter one right

so we start with that mm and then we say

okay now we're receiving 90,000 where

did we get that 90,000 from customers

came from our sales budget right now

that means cash available a ninety two

grand and then now we've got our

disbursements those come from our other

budgets our direct material budget our

SGA budget and so forth disbursements

total up to 46,000 we take the cash

available in ninety two thousand

subtract the disbursements of forty six

thousand and that leaves us with another

forty six thousand but this time it's an

excess that means that we have more cash

after we've said okay how much cash do

we have and how much do we spend we have

46,000 left over now we don't need to

borrow anything this time because we

have an excess of cash we have extra

cash and so we're going to do a

repayment right we're going to do

repayment and so this is thirty five

hundred to repay that loan to the family

member and I've got the thirty five

hundred in parentheses because we're

saying this is negative this is this is

I've just just little convention here so

we know that this thirty five hundred

from the borrowing has been zeroed out

and so we're saying that ultimately even

though we have an excess of cash of

forty six thousand we're subtracting the

thirty five hundred we repaid alone and

so now our ending balance is forty two

five which is forty six thousand - the

$3,500 repayment now in quarters three

and four it's a little simpler because

we don't have any borrowings or

repayments or anything going on and you

notice so I'm not going to walk through

all of Quarter three and quarter four

because they're fairly straightforward

you should be able to figure it out at

this point now when you look at it we

say hey we're really generating a lot of

cash in these summer months right

because we're collecting a lot more from

customers right quarter two and quarter

three we're generating ninety thousand

and sixty thousand and cash receipts

from customers respectively whereas in

quarter one we only generate fifteen

thousand right because there's not a lot

of people buying bicycles in January

they're buying them in June and so forth

so we've got the seasonality issue

where we had problems in quarter one

with cash but we were able to budget we

are able to plan and show our family

member and say hey look we're going to

generate a lot of cash in the summer

right well we're going to sell a lot of

bicycles we just need you to float us

this money right now so we can deal with

the temporary shortage but if we didn't

have a budget if we didn't have a plan

then we would have all kinds of issues

because we don't really have a plan of

how we're going to have the cash to

finance and fund our business throughout

the year and then when we we look at our

final column we've got our year year

total and it basically a lot of this is

just summaries of things throughout the

year here's the summaries of our

disbursements and so forth but when we

look of course at the beginning balance

it's the beginning balance of quarter

one not not the total of all these four

four reasons we talked about in our

previous videos and ultimately at the

end of the year we're going to be left

with seventy three thousand five hundred

dollars which is also the ending balance

of course four quarter four